RAM Ratings reiterates expectations of softer CPO prices

Published on 12 Feb 2018.

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RAM Ratings reiterates that CPO prices will likely soften to RM2,300-RM2,500 per metric tonne (MT) this year (2017: RM2,783/MT), as production normalises and outstrips demand growth. The abundant supply of vegetable oils and high CPO inventory levels in both Malaysia and Indonesia would also suppress CPO prices.

Malaysia’s CPO production summed up to 19.9 million MT in 2017 (+15% y-o-y), as palm trees slowly recovered from one of the industry’s worst El Nino aftermaths in 2015/2016. Elsewhere, Indonesia’s output also strengthened 17% y-o-y to 38.2 million MT. Despite this strong growth, yield recovery and palm output were below market expectations. With palms expected to fully recover this year, production is likely to normalise. The Malaysian Palm Oil Board projects local output to rise 3% y-o-y to 20.5 million MT in 2018 while the Indonesian Palm Oil Association expects a 10% y-o-y growth in the production of CPO and palm kernel oil. 

Last year, Malaysia’s palm-oil exports edged up 3% (2016: -8% y-o-y), supported by demand from key markets such as China (+2% y-o-y) and Pakistan (+16%). The Malaysian Government’s temporary suspension of export taxes for 3 months effective 8 January 2018 (provided stock levels do not fall to 1.6 million MT) is expected to boost local exports in the interim. Notably, Indonesian CPO exports rebounded a strong 21% y-o-y in 2017, driven by robust demand from India (+32%), the EU (+15%), China (+16% y-o-y), Pakistan (+7%) and the US (+9%). Despite the anticipated healthy demand growth for CPO this year, it is anticipated to lag supply growth, exacerbating already high inventory levels (Malaysia: 2.7 million MT; Indonesia: 4.0 million MT).

The US Department of Agriculture (USDA) projects global supply of vegetable oils to advance another 4% in 2017/2018, following a 7% growth in 2016/2017. The USDA also expects the price of soybean oil (SBO, a key rival of CPO) to be lifted another 4% in 2017/2018. The abundant supply of SBO poses keen competition against CPO within the global vegetable-oil market. Nevertheless, the wider price premium for SBO over CPO (which came up to USD194/MT in December 2017) will be supportive of CPO prices.

Meanwhile, the EU Parliament’s proposed ban on the use of palm oil in biofuel production is envisaged to affect CPO prices in the interim as the EU is the second largest export market for both Malaysia and Indonesia. The longer-term impact is likely to be more muted given the stable demand growth of vegetable oils and as most of the demand for palm oil still stems from the food market. The quantum of palm oil used in biofuel production in the EU comes up to some 3.5 million MT – equivalent to about 5% of global palm-oil output in 2017. 

 

Analytical contact
Karin Koh, CFA
(603) 7628 1174
karin@ram.com.my

Media contact
Padthma Subbiah
(603) 7628 1162
padthma@ram.com.my

 

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